Court: FTC Can Regulate Payday Lenders Affiliated With Indian Tribes

In what is being hailed by the Federal Trade Commission as a victory for regulators, a federal court judge in Nevada has ruled that the FTC has the authority to bring suit against payday lenders affiliated with American Indian tribes.

In 2012, the FTC filed a complaint against multiple defendants accusing them of violating the Federal Trade Commission Act, the Truth in Lending Act and the Electronic Fund Transfer Act. Specifically, the agency alleged the defendants engaged in unfair and deceptive practices by offering and extending “high-fee, short-term ‘payday’ loans and the collection of those loans.”

The court bifurcated the case and said it would first determine whether—and to what extent—the FTC has authority over the parties asserting Indian tribe sovereignty. The defendants argued that, because they were arms of an Indian tribe, employees of an arm of an Indian tribe or businesses associated with arms of an Indian tribe, the FTC lacked the authority to regulate them.

But U.S. District Judge Gloria M. Navarro, affirming a report and recommendation of a magistrate judge, disagreed.

“[T]he FTC Act is a federal statute of general applicability that under controlling Ninth Circuit precedent grants the FTC authority to regulate arms of Indian tribes, their employees, and their contractors,” she concluded.

Judge Navarro shot down three lines of argument from the defendants. First, the burden of establishing whether the defendants fell within the FTC’s jurisdiction to enforce the FTC Act fell on the charged parties, she wrote, not the agency, because of their attempt to claim an exemption from the act.

Second, the court determined that the FTC Act is a statute of general applicability. The FTC “has broad powers” under the act, and on its face, grants the agency “broad authority to bring suit against ‘any person, partnership, or corporation’ for violating ‘any provision of law enforced by the [FTC],’” the court said. Significantly, however, a genuine issue of material fact exists, held the court, concerning whether the tribal chartered defendants qualify as “corporations” under the FTC Act.

Although the FTC Act contains exceptions to the agency’s authority, the court said the issue is whether the statute is generally applicable, not universally applicable. “The defendants offer no compelling explanation as to why the FTC Act should be treated differently from these other broad federal statutes of general applicability,” Judge Navarro wrote, referencing the Occupational Health and Safety Act, the Employee Retirement Income Security Act, the National Labor Relations Act, and the Contraband Cigarette Trafficking Act, all of which have been ruled to be statutes of general applicability.

Finally, prior case law and Indian canons did not yield a different result, the court said. The defendants attempted to rely upon disputes over sovereignty between Indian tribes and private or state actors rather than the federal government acting in its law enforcement capacity or cases applying Indian canons of construction when interpreting the abrogation of treaty rights—neither of which applied to the case at hand. The court noted that under U.S. Court of Appeals for the Ninth Circuit precedent, federal statutes of general applicability that are silent on the issue of applicability to Indian tribes do apply to Indian tribes unless “(1) the law touches on ‘exclusive rights of self-governance in purely intramural matters,’ (2) application of the law to the tribe would abrogate treaty rights, or (3) there is some proof that Congress intended the law to be inapplicable to Indian tribes.”

Why It Matters: The FTC hailed the decision as a “significant victory” as regulators around the country have turned their attention to payday lenders (click here to read our previous newsletter). “This ruling makes it crystal clear that the FTC’s consumer protection laws apply to businesses that are affiliated with tribes,” the director of the agency’s Bureau of Consumers Protection, Jessica Rich, said in a press release. “It’s a strong signal to deceptive payday lenders that their days of hiding behind a tribal affiliation are over.” Not every court agrees, however, as a California appellate court recently affirmed the dismissal of a complaint filed by a state financial regulator against five Indian tribe-affiliated lenders (click here to read our previous newsletter), finding that the defendants were sufficiently related to their respective tribes to be protected by sovereign immunity. In addition, should the court find at trial that the tribal chartered defendants are not for-profit “corporations” subject to the FTC Act, they are then beyond the jurisdiction of the FTC. Such a ruling would be a “significant victory” for the tribal chartered defendants.

Fed Report Finds Use of Mobile Financial Services Continues to Grow

The use of mobile financial services continues to grow, with 33 percent of all mobile phone users and 51 percent of smartphone users engaging in mobile banking over the prior 12-month period, according to a new report from the Federal Reserve Board.

“Consumers and Mobile Financial Services 2014” is the agency’s most recent review of mobile banking and mobile payments, two prior annual reports having been released.

Among the surveyed consumers, the most common banking activities continue to be reviewing account balances or recent transactions (93 percent of mobile banking users) and transferring money (57 percent). The Fed found that the use of mobile phones to deposit checks increased significantly over the prior year (up to 38 percent from 21 percent).

Mobile phones are also changing the way consumers make payments, the Fed said. One area of substantial growth: the use of mobile phones to make payments at a point of sale, with 17 percent of smartphone users (representing 9 percent of the U.S. adult population) reporting they used their phone to make a purchase at a retail store over the last year, an almost threefold increase. The most common form of mobile payment is bill payment, used by 66 percent of mobile payment users, up from 42 percent in the prior year.

The survey also noted that the use of mobile financial services is particularly prevalent among the 17 percent of the population considered to be underbanked. Of the 88 percent of underbanked consumers with mobile phones, 39 percent engaged in mobile banking in 2013, the report found.

According to the report, the use of mobile phones to make decisions while shopping has also increased. Forty-four percent of smartphone users compared prices while shopping and 42 percent checked product reviews. The information gleaned from such activities resulted in more than 66 percent of respondents changing where they made a purchase after reviewing the price comparisons.

The report is based on data collected during the month of December 2013 from more than 2,600 respondents about their mobile banking activity during the 2013 calendar year.

Why It Matters: The Federal Reserve Board’s report serves to confirm what the industry already knew: Consumers are increasingly relying upon mobile devices for financial services. Interestingly, however, the report also documented that even as the use of mobile banking continues to rise, those consumers who do not engage in mobile banking are less likely to ever use it. Of the consumers who do not currently use mobile financial services, more than half expressed no interest in the technology; others expressed concern about the security of features like point-of-sale payments; and just 12 percent said they will “probably” use mobile banking within the next 12 months.

For National Banks, Home Is Where Your Main Office Is, Says Ninth Circuit

A national bank is a resident only of the state designated as its main office—not the state where the principal place of business is located, the U.S. Court of Appeals for the Ninth Circuit held in a split decision.

The dispute centered around 28 U.S.C. Section 1348, which states that national banking associations are “citizens of the States in which they are respectively located.” The term “located” is not defined in the statute.

Robert and Victoria Rouse filed suit against Wells Fargo Bank in California state court, raising causes of action under both state and federal law about their home loan and deed of trust. Wells Fargo removed the suit to federal court on the basis of federal questions and diversity of citizenship.

Seeking to return to state court, the Rouses filed an amended complaint limited to state law claims, leaving diversity jurisdiction as the basis for keeping the case in federal court. The judge determined that national banks are citizens not just of the state where the main office is located but also of the state where their principal place of business is located, in part relying upon the principle of jurisdictional parity between state and federally chartered banks.

Because Wells Fargo’s principal place of business is in California, where the Rouses are citizens, the district court remanded the case to state court for lack of jurisdiction.

Wells Fargo appealed and the Ninth Circuit struggled to interpret the meaning of “located.” Finding that the “sparse text of the statute offers no definitions,” the federal appellate panel noted that the U.S. Supreme Court has held, in the context of Section 1348, that the word “located” is ambiguous on its face and “a chameleon word.” So the court looked beyond the statutory text and ordinary use of the term to discern its meaning.

The panel began with a 2006 Supreme Court decision, Wachovia Bank v. Schmidt, which addressed a similar but distinct issue: whether a federally chartered national bank is a citizen of every state where it operates a branch in addition to the state where its main office is designated. That case settled a circuit split on the issue and held that for Section 1348 purposes, a national bank is “a citizen of the state in which its main office, as set forth in its articles of association, is located.”

The Ninth Court did not end its analysis with Wachovia Bank, however, distinguishing that decision because the justices did not squarely address whether a national bank is also a citizen of the state where it has its principal place of business.

After reviewing case law since Wachovia Bank as well as the historical landscape of Section 1348, the Ninth Circuit concluded that “a national bank is ‘located’ only in the state designated as its main office.”

The panel also found that the principle of jurisdictional parity relied upon by the district court was no longer in play. “Congress began its treatment of jurisdiction for national banks with a notion of jurisdictional parity that it later affirmatively deleted from the statute,” the court said. “Nothing in the current version of the statute or in its history suggests that Congress intended to revive the principle of jurisdictional parity between state-chartered banks and national banks.”

The statute itself does not contain any reference to jurisdictional parity, the court added.

“[T]he current version of the statute does not include an ethereal incorporation of any principle of jurisdictional parity between state-chartered banks and national banks for suits asserting diversity as a basis for federal jurisdiction,” the panel wrote. “We hold that, under Section 1348, a national banking association is a citizen only of the state in which its main office is located. Accordingly, Wells Fargo is a citizen only of South Dakota, where its main office is located.”

Therefore, diversity jurisdiction exists between the parties as the Rouses are citizens of California, the Ninth Circuit held, and it reversed the district court’s order remanding the case to state court.

A dissenting opinion criticized the majority for neglecting the jurisdictional parity between state and federal banks and placing “national banks on superior footing in their access to federal courts as compared to other corporations.” Policy implications should also have been considered, the dissent added, because a bank closely identified with a given state could ensure diversity jurisdiction by designating its main office in a different state.

Why It Matters: Despite the fact that Congress established national banks in 1863, the question of their citizenship for diversity jurisdiction purposes remains unsettled 150 years later, the Ninth Circuit noted. The courts are split on the issue (the Eighth Circuit has reached a similar conclusion with contrary results in federal district courts), and the U.S. Supreme Court has not squarely addressed it. At least in the Ninth Circuit, for national banks the state of their designated main office is the state where they are “located” for purposes of diversity jurisdiction.

To strengthen the U.S. payment system in the wake of massive holiday breaches that occurred at Target and Neiman Marcus (and subsequent finger-pointing), Visa and MasterCard announced a plan to work with large and small banks, credit unions, acquirers, retailers, point-of-sale device manufacturers, and industry trade groups.

The record-setting data breaches resulted in multiple lawsuits (click here to read our previous newsletter) and arguments about what various entities needed to do to better protect consumers. Now, members of the payments system have agreed to form a working group as a “public recognition of the importance of all parties to work together” to accelerate payment security, according to a statement about the group’s formation.

The first item on the agenda: the use of digital chips embedded in debit and credit cards to store account information as a replacement for the current magnetic strips. The EMV chip technology (which is commonly used in Asia and Europe) makes the theft of credit and debit card numbers more challenging.

MasterCard and Visa had established an October 2015 deadline for retailers to incorporate the technology necessary to recognize such cards.

Other items up for consideration include a move from signatures to the use of PIN numbers to complete a card transaction, the use of a one-time number for online sales as “an additional layer of security” and stronger encryption methods.

Why It Matters: In addition to pushing the use of EMV technology, the cross-industry payment security working group also proposed long-term goals, including the development of “an actionable roadmap for securing the future across all segments of the payment industry.”